Housing Market Forecast: What you need to know NOW

Portions of this article were taken from: Nancy F. Smith and Ilyce Glink

Surveying the wreckage of the residential real estate market, it's hard to remember that as recently as mid-2006, the conventional wisdom was that housing prices nationwide couldn't go down. At that time, homeowners were sitting atop a five-year, 66% appreciation in home values and a $6.5 trillion mother lode of home equity. Americans were so confident that their perceived new wealth was real that they extracted $1.2 trillion of it between 2001 and 2006, according to Alicia H. Munnell, director of the Center for Retirement Research at Boston College. Then, between 2006 and 2009, the median sale price fell 32% and $4 trillion evaporated from owner's net worth.

PRICES ARE GOING NOWHERE FOR AT LEAST SEVEN YEARS

Economists and real estate pundits quibble over exactly when prices will begin to rise, but everyone agrees it won't be soon. And, of course, some markets will do better than others. Even after the market does bottom out, most economists foresee several years of stagnant prices as people who've been holding back put their houses on the market and builders who've been sidelined begin to add new construction to the inventory. "House prices will probably negative this year, zero next year, and then mostly stagnant for about five years," says David W. Berson, chief economist with mortgage insurers PMI Group. "After that, the inventory of unsold homes should be worked off enough to go back to the historic rate of appreciation- a little bit more than inflation, or about 4% a year."

Why such a pessimistic forecast? Pick any measure of the housing market's health, and you'll find powerful and persistent headwinds.

• Foreclosures are at historic levels: More than 1.7 million homes were repossessed between the peak in 2006 and the first quarter of 2009. This year, another 3.1 million households will fall into some phase of foreclosure. In a normal market, about 1% of loans are in foreclosure. In today's market, it's about 4%. These properties sell at about 25%-30% of their nominal market price, and they are a big percentage of total sales (45% in April according to the National Association of Realtors). With about one in five mortgages under water, "foreclosures will be with us at significant levels for at least a couple of years," says Andrew LaPage, analyst with MDA DataQuick, a real estate information service. "It's going to take a while to burn through all the inventory".
• Defaults on jumbo mortgages will soon surge: The next shoe to drop is likely to be houses at the high end, where jumbo mortgages reside (any amount above $417,000 in Wisconsin). "Conforming mortgages have benefited from an unprecedented loosening of credit by the Federal Reserve through Fannie Mae, Freddie Mac, Ginnie Mae, and FHA," Berson says. "Not so the jumbo market. It's completely moribund." Jumbo-loan originations have dropped 71% in the first three quarters of 2008, the lowest level in five years. Many adjustable rate mortgages will reset this year, and without financing, there's not a lot the owner can do, that's where the next round of foreclosures will come from.
• There are too many houses for sale: More than 10 months' worth of houses were waiting to sell in April, according to the National Association of Realtors. A healthy market would be about 6 months. Distant suburbs have an especially abundant backlog. "These were growth areas where builders offered all kinds of creative financing to get people into their newly built houses," says LePage. The farther out they are, the less attractive they are to new buyers. "People can get past a lot of concerns about the long drive to work, for example, or how sterile the neighborhood is if they feel they've made an investment that will pay off." Those incentives are now gone, and-with gas prices going up again- the exurbs will be hurting for years.
• Unemployment is too high: Until recently, subprime mortgages drove foreclosures. For the second half of the year, joblessness will be the driving force. As long as the unemployment numbers remain high, foreclosures will keep coming.

So what can you do now? Take action! If you are a seller, get realistic about what you can get for your house. With so little upside in the foreseeable future, you may be better off to sell (even at a loss) since you will be able to get back into a similar house at a much lower price...or buy a larger home for what you are paying for your smaller home now. If you are thinking of buying, remember that the benefits of homeownership will be what they always were- tax breaks, a hedge against rising interest rates and inflation, the stability of owner-occupied neighborhoods- but they won't include the kind of massive run-up in equity that characterized the past few years.

FIRST TIME HOMEBUYERS AND INVESTORS WILL MAKE OUT LIKE BANDITS!

This may be the best opportunity first-time home buyers will have for decades! Prices are attractive and interest rates are hovering at or around 5% (which will go up at years end to over 6%), which is the lowest in 40 years! In many markets, you can buy cheaper than you can rent. With 5% down and a 30-year fixed-rate mortgage on a $150,000 home, your monthly payment would be $805, easily competitive with rents for a similarly sized house in most places.

Speculating in the foreclosure market is far from a sure thing, but some real estate investment firms and a hardy band of investors are taking advantage of the suddenly reduced prices. Most are responding to sharp declines in sale prices relative to rents, which creates a very good opportunity to buy rental properties. The demand for rentals has grown as more homeowners sell or are forced from their homes. Between 2005 and 2007 when the housing market really started showing signs of collapse, we saw an increase of 1.6 million single-family homes and condos occupied by renters. There's a very good chance that the value of these properties will rise at some future point, and buyers will get a good return on their investments.

So what do you do? First-time buyers, save enough for a down payment of at least 10%, but shoot for 20%. You want to be in the best possible situation where you put a bid in on a house and actually get your mortgage financing. Without a decent FICO score, it's hard to get a loan even if you are willing to pay a higher interest rate. Follow the Golden Rules of Homeownership: Buy when you feel secure in your job and you plan to stay in the house for at least five years. Allocate a maximum of 28% of your pretax income to your mortgage payment (including taxes and insurance).

PROPERTY TAXES WILL GO UP!

It's a straightforward formula, Wisconsin (and most other states) are swimming in red ink. Since legislatures hate to raise taxes, many are faced with draconian cuts to their budgets. The single largest item on most budgets is school aid. Ergo, school districts are going to be scrambling to make up the lost money, and they have only one significant source of revenue: property taxes. Research states that local governments will raise taxes 25 cents for every dollar of state aid that is lost. The cuts in state aid to local governments will be greater than they've been in many years, and that puts pressure on property taxation.

With assessed values currently falling, local governments will be forced to raise tax rates. "When home prices were climbing, rising assessments kept rates in check," says Andrew Reschovsky, economist at the University of Wisconsin. "And most people paid their taxes. The big question now is whether citizens will push back against rapidly rising tax rates. No one really knows."

Property taxes have two components: the tax rate and the assessed value of your property. You have some control over the latter. Make sure that it's in line with the current value of your home. If it's too high, challenge it. Locking in a lower assessment right now will reduce your taxes in years to come. Only 5% of homeowners appeal their assessments, according to the National Taxpayers Union, despite the fact that as many as 60% of taxable property in the US is over-assessed, and most of those who do appeal get some kind of relief.

To respond to this blog with questions or comments, please email me at bkrull@firstweber.com.